AVNET INC (AVT)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For a description of the Company’s critical accounting policies and an understanding of Avnet and the significant factors that influenced the Company’s performance during the past three fiscal years, the following discussion should be read in conjunction with the description of the business appearing in Item 1 of this Report and the consolidated financial statements, including the related notes and schedule, and other information appearing in Item 8 of this Report. Discussions of fiscal 2022 items and year-to-year comparisons between fiscal years 2023 and 2022 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2023. The Company operates on a “52/53 week” fiscal year. Fiscal years 2024, 2023 and 2022 each contained 52 weeks.

The discussion of the Company’s results of operations includes references to the impact of foreign currency translation. When the U.S. Dollar strengthens and the stronger exchange rates are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the result is a decrease in U.S. Dollars of reported results. Conversely, when the U.S. Dollar weakens, the weaker exchange rates result in an increase in U.S. Dollars of reported results. In the discussion that follows, results excluding this impact, primarily for subsidiaries in EMEA and Asia, are referred to as “constant currency.”

In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the U.S. (“GAAP”), the Company also discloses certain non-GAAP financial information, including:

The following table provides a reconciliation of operating income to adjusted operating income:

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Management believes that providing this additional information is useful to financial statement users to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods, primarily because management typically monitors the business both including and excluding these adjustments to GAAP results. Management also uses these non-GAAP measures to establish operational

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goals and, in many cases, for measuring performance for compensation purposes. However, any analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, results presented in accordance with GAAP.

Industry outlook

The global electronic components market has a history of cyclical downturns followed by periods of increased demand. Beginning in the second half of calendar year 2023, the industry began to experience a downturn marked by a decrease in sales due to a combination of elevated customer inventory levels and lower underlying demand for electronic components. As a result, the Company has seen elevated inventory levels and decreased sales, resulting in lower operating income. The duration of the current downturn is uncertain. The Company expects sales in the first quarter of fiscal 2025 to be flat to 5% lower than fourth quarter of fiscal 2024 sales, which will negatively impact operating income and diluted earnings per share.

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Results of Operations

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Sales

Analysis of Sales: By Operating Group and Geography

The table below provides sales decline rates for fiscal 2024 as compared to fiscal 2023 as reported and on a constant currency basis by geographic region and operating group.

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Avnet’s sales for fiscal 2024 were $23.76 billion, a decrease of $2.78 billion, or 10.5%, from fiscal 2023 sales of $26.54 billion. Sales in constant currency decreased 10.9% year over year, reflecting a reduction in sales volume primarily due to the on-going market downturn occurring across the electronic components industry and, to a lesser extent, an unfavorable product mix of lower priced electronic components.

EC sales in fiscal 2024 were $22.16 billion, representing a 10.7% decrease over fiscal 2023 sales of $24.80 billion. EC sales decreased 11.0% year over year in constant currency. The decrease in EC sales is primarily due to sales volume decreases across all three regions due to the market downturn in the electronic components industry and, to a lesser extent, an unfavorable product mix of lower-priced electronic components. Average selling prices of electronic components at EC remained relatively stable between fiscal 2024 and fiscal 2023.

Farnell sales in fiscal 2024 were $1.60 billion, a decrease of $137.2 million or 7.9%, from fiscal 2023 sales of $1.73 billion. The year-over-year decrease in sales was primarily a result of lower demand, including lower demand for on-the-board electronic components, partially offset by increases in availability and demand for single-board computers.

Gross Profit

The Company’s gross profit is primarily affected by sales volume and geographic sales mix. Gross profit in fiscal 2024 was $2.77 billion, a decrease of $415.7 million, or 13.1%, from fiscal 2023 gross profit of $3.18 billion primarily due to lower sales volumes, as described above. Gross profit margin decreased to 11.6% in fiscal 2024 or 35 basis points from fiscal 2023 gross profit margin of 12.0%. The decrease in gross profit margin is primarily due to an increase in product mix to lower margin electronic components. Sales in the higher margin western regions represented approximately 60% of sales in both fiscal 2024 and fiscal 2023.

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EC gross profit margin decreased year over year largely due to an increase in product mix to lower margin electronic components. Average selling prices of electronic components at EC remained relatively stable between fiscal 2024 and fiscal 2023.

Farnell gross profit margin decreased year over year, primarily due to lower sales of higher margin on-the-board electronic components and the unwinding of component shortage pricing premiums for on-the-board electronic components in fiscal 2024.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A expenses”) in fiscal 2024 were $1.87 billion, a decrease of $97.8 million, or 5.0%, from fiscal 2023. The year-over-year decrease in SG&A expenses was primarily due to decreases in variable operating expenses associated with the decrease in sales volumes discussed above and to a lesser extent the impact of restructuring actions, partially offset by increases in costs due to inflation and the impact of changes in foreign currency translation rates.

Metrics that management monitors with respect to its operating expenses are SG&A expenses as a percentage of sales and as a percentage of gross profit. In fiscal 2024, SG&A expenses as a percentage of sales were 7.9% and as a percentage of gross profit were 67.6%, as compared with 7.4% and 61.8%, respectively, in fiscal 2023. The increases in SG&A expenses as a percentage of sales and gross profit resulted primarily from the decreases in sales and gross profit without a proportional reduction in SG&A expenses, resulting in lower operating leverage.

Restructuring, Integration and Other Expenses

During fiscal 2024, the Company implemented a plan to reduce SG&A expenses at Farnell and deliver approximately $60 million in annual expense reductions. Additionally, the Company began expense reduction initiatives within EC and for corporate expenses, which are expected to yield additional annual cost savings of approximately $50 million when completed. As such, the Company recorded $39.5 million for restructuring costs in fiscal 2024 primarily related to severance and other employee-related expenses associated with the reduction, or planned reduction, of approximately 600 employees across the Company. The Company also incurred integration, and other expenses of $13.1 million. Integration expenses of $13.1 million related to the Company’s consolidation of several smaller warehouses predominantly related to Farnell, and other expenses of $5.5 million related to certain costs associated with potential M&A activity that did not lead to a transaction. Additionally, the Company recorded a benefit of $5.5 million, primarily related to environmental remediation reserves after entering into a favorable consent decree with a state agency for a certain environmental cleanup matter. The after-tax impact of restructuring, integration, and other expenses were $39.6 million and $0.43 per share on a diluted basis.

During fiscal 2023 the Company recorded restructuring, integration, and other expenses of $28.0 million, which includes $17.4 million for restructuring costs, consisting of $16.1 million for severance, $0.5 million for facility exit costs, and $0.8 million for asset impairments.

See Note 17, “Restructuring expenses” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information related to restructuring expenses.

Operating Income

Operating income for fiscal 2024 was $844.4 million, a decrease of $342.4 million or 28.9%, from fiscal 2023 operating income of $1.19 billion. Operating income margin was 3.6% in fiscal 2024 compared to 4.5% in fiscal 2023.

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Adjusted operating income for fiscal 2024 was $900.0 million, a decrease of $320.8 million or 26.3%, from fiscal 2023 adjusted operating income of $1.22 billion. Adjusted operating income margin was 3.8% in fiscal 2024 compared to 4.6% in fiscal 2023. The decreases in operating income and operating income margin are primarily due to the decrease in gross profit primarily from lower sales without a proportionate decrease in SG&A expenses, as discussed above. Additionally, the Company incurred higher restructuring, integration, and other expenses during fiscal 2024 compared to such expenses in fiscal 2023.

EC operating income decreased 19.7% to $947.6 million, and EC operating income margin decreased 48 basis points to 4.3% in fiscal 2024, with all three regions contributing to the decrease. Farnell operating income decreased 60.8% to $64.8 million in fiscal 2024 and Farnell operating income margin decreased 548 basis points to 4.1% in fiscal 2024. The decreases in operating income and operating income margin in both operating groups are due to the decrease in gross profit primarily from lower sales and gross margin without a proportionate decrease in SG&A expenses.

Interest and Other Financing Expenses, Net and Other (Expense) Income, Net

Interest and other financing expenses for fiscal 2024 was $282.9 million, an increase of $32.0 million, or 12.8%, compared with interest and other financing expenses of $250.9 million in fiscal 2023. The increase in interest and other financing expenses in fiscal 2024 compared to fiscal 2023 is a result of higher outstanding borrowings and increases in average borrowing rates.

The Company had other expenses of $15.7 million in fiscal 2024, compared to other income of $9.9 million in fiscal 2023. The increase in other expenses is primarily due to foreign currency translation losses.

Gain on Legal Settlements and Other

During fiscal 2024 and fiscal 2023, the Company recorded a gain on legal settlements and other of $86.5 million and $74.4 million, respectively, in connection with the settlement of claims filed against certain manufacturers of capacitors. In fiscal 2023, the Company settled a portion of its pension liability related to certain retirees and terminated vested employees in the Company’s U.S. pension plan as part of a de-risking strategy and recognized non-cash settlement expense of $37.4 million. See Note 13, “Commitments and contingencies” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information related to the gain on legal settlements.

Income Tax

Income tax expenses were $133.6 million in fiscal 2024, reflecting an effective tax rate of 21.1% as compared to income tax expenses of $212.0 million in fiscal 2023, reflecting an effective tax rate of 21.6%. The decrease in the effective tax rate in fiscal 2024 as compared to fiscal 2023 was primarily due to the mix of income in lower tax foreign jurisdictions, partially offset by increases to unrecognized tax benefit reserves, net of settlements.

See Note 9, “Income taxes” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on the effective tax rate.

Net Income

As a result of the factors described in the preceding sections of this MD&A, the Company’s net income in fiscal 2024 was $498.7 million, or earnings per share on a diluted basis of $5.43, compared with fiscal 2023 net income of $770.8 million, or earnings per share on a diluted basis of $8.26.

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Liquidity and Capital Resources

Cash Flows

Operating Activities

Net cash provided by operating activities was $690.0 million during fiscal 2024, compared to net cash used by operating activities of $713.7 million during fiscal 2023. The $1.40 billion increase in net cash provided by operating activities year over year is primarily due to improvements in cash used for working capital and other as working capital levels have reduced as a result of declines in sales, offset by lower cash provided by net income. Cash generated by working capital and other was $11.2 million during fiscal 2024, compared to cash used for working capital of $1.68 billion during fiscal 2023, with the difference attributable primarily to cash used for inventories. During fiscal 2024, the Company used less cash for inventories as less inventory was purchased due to inventory levels already being elevated and because of lower sales. The Company also had decreases in accounts receivable due to lower sales when compared to the prior year. The Company received $90.7 million of cash from legal settlements during fiscal 2024 as compared to $69.9 million of cash received from legal settlements during fiscal 2023.

Financing Activities

Net repayments of debt totaled $156.5 million during fiscal 2024, including the repayment of $140.7 million under the Securitization Program, and $43.3 million under the Credit Facility, offset by net proceeds of $27.5 million for other debt. This compares to $1.39 billion of net borrowing during fiscal 2023. The Company paid cash dividends to shareholders of $1.24 per share, or $112.0 million, during fiscal 2024 as compared to $1.16 per share, or $106.3 million, during fiscal 2023. The Company has repurchased $162.7 million of common stock under the share repurchase plan during fiscal 2024 compared to $221.7 million during fiscal 2023.

Investing Activities

The Company’s purchases of property, plant and equipment increased during fiscal 2024 by $31.8 million, when compared to fiscal 2023, primarily due to a distribution center investment in EMEA. During fiscal 2023, the Company used $16.9 million for other investing activities.

Financing Transactions

The Company uses a variety of financing arrangements, both short-term and long-term, to fund its operations in addition to historical cash generated from operating activities. The Company also uses several funding sources to avoid becoming overly dependent on one financing source, and to lower overall funding costs. These financing arrangements include public debt (“Notes”), short-term and long-term bank loans, a revolving credit facility (the “Credit Facility”), and an accounts receivable securitization program (the “Securitization Program”).

The Company has various lines of credit, financing arrangements, and other forms of bank debt in the U.S. and various foreign locations to fund the short-term working capital, foreign exchange, overdraft, capital expenditure, and letter of credit needs of its wholly owned subsidiaries. Outstanding borrowings under such forms of debt at the end of fiscal 2024 was $100.4 million.

As an alternative form of liquidity outside of the United States, the Company sells certain of its trade accounts receivable on a non-recourse basis to financial institutions pursuant to factoring agreements. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the

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consolidated statements of cash flows. Factoring fees for the sales of trade accounts receivable are classified within “Interest and other financing expenses, net” of the consolidated financial statements.

See Note 7, “Debt” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information on financing transactions including the Credit Facility, the Securitization Program and the outstanding Notes as of June 29, 2024.

Covenants and Conditions

The Company’s Credit Facility contains certain covenants with various limitations on debt incurrence, share repurchases, dividends, investments and capital expenditures, and also includes financial covenant requiring the Company to maintain a leverage ratio below a certain threshold. The Company was in compliance with all such covenants as of June 29, 2024.

The Company’s Securitization Program contains certain covenants relating to the quality of the receivables sold. If these conditions are not met, the Company may not be able to borrow any additional funds and the financial institutions may consider this an amortization event, as defined in the Securitization Program agreements, which would permit the financial institutions to liquidate the accounts receivables sold to cover any outstanding borrowings. Circumstances that could affect the Company’s ability to meet the required covenants and conditions of the Securitization Program include the Company’s ongoing profitability and various other economic, market, and industry factors. The Company was in compliance with all such covenants as of June 29, 2024.

Management does not believe that the covenants under the Credit Facility or Securitization Program limit the Company’s ability to pursue its intended business strategy or its future financing needs.

See Liquidity below for further discussion of the Company’s availability under these various facilities.

Liquidity

The Company held cash and cash equivalents of $310.9 million as of June 29, 2024, of which $179.6 million was held outside the United States. As of July 1, 2023, the Company held cash and cash equivalents of $288.2 million, of which $194.5 million was held outside of the United States.

During periods of weakening demand in the electronic components industry, the Company typically generates cash from operating activities. Conversely, the Company will use cash for working capital requirements during periods of higher growth. The Company generated $690.0 million in cash flows for operating activities during the fiscal year ended June 29, 2024.

Liquidity is subject to many factors, such as normal business operations and general economic, financial, competitive, legislative, and regulatory factors that are beyond the Company’s control. Cash balances held in foreign locations that cannot be remitted back to the U.S. in a tax efficient manner are generally used for ongoing working capital, including the need to purchase inventories, capital expenditures and other foreign business needs. In addition, local government regulations may restrict the Company’s ability to move funds among various locations under certain circumstances. Management does not believe such restrictions would limit the Company’s ability to pursue its intended business strategy.

As of June 29, 2024, there were $745.5 million of borrowings outstanding under the Credit Facility and $0.9 million in letters of credit issued, and $415.1 million outstanding under the Securitization Program. During fiscal 2024,

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the Company had an average daily balance outstanding under the Credit Facility of approximately $1.17 billion and $596.7 million under the Securitization Program. As of June 29, 2024, the combined availability under the Credit Facility and the Securitization Program was $844.5 million. Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable in the United States to support desired borrowings.

The Company has the following contractual obligations outstanding as of June 29, 2024 (in millions):

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The Company purchases inventories in the normal course of business throughout the year through the issuance of purchase orders to suppliers. During fiscal 2024, the Company’s cost of sales, substantially all of which related to the underlying purchase of inventories was $21.0 billion and the Company had $5.5 billion of inventories as of June 29, 2024. The Company expects to continue to purchase sufficient inventory to meet its customers’ demands in fiscal year 2025, some of which relates to outstanding purchase orders at the end of fiscal 2024. Outstanding purchase orders with suppliers may be non-cancellable/non-returnable at the point such orders are issued, or may become non-cancellable at some point in the future, typically within 30 days to 90 days from the requested delivery date of inventories.

At June 29, 2024, the Company had an estimated liability for income tax contingencies of $130.3 million, which is not included in the above table. No cash payments associated with the settlement of these liabilities are expected to be paid within the next 12 months. The settlement period for the remaining amount of the unrecognized tax benefits, including related accrued interest and penalties, cannot be determined, and therefore was not included in the table.

As of June 29, 2024, the Company may repurchase up to an aggregate of $153.7 million of shares of the Company’s common stock through the share repurchase program approved by the Board of Directors. The Company may repurchase stock from time to time at the discretion of management, subject to strategic considerations, market conditions including share price and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. During fiscal 2024, the Company repurchased $164.8 million of common stock.

The Company has historically paid quarterly cash dividends on shares of its common stock, and future dividends are subject to approval by the Board of Directors. During the fourth quarter of fiscal 2024, the Board of Directors approved a dividend of $0.31 per share, which resulted in $27.8 million of dividend payments during the quarter.

The Company continually monitors and reviews its liquidity position and funding needs. Management believes that the Company’s ability to generate operating cash flows through the liquidation of working capital in the future and available borrowing capacity, including capacity for the non-recourse sale of trade accounts receivable, will be sufficient to meet its future liquidity needs. Additionally, the Company believes that it has sufficient access to additional liquidity from the capital markets if necessary.

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Critical Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. These estimates and assumptions are based upon the Company’s continual evaluation of available information, including historical results and anticipated future events. Actual results may differ materially from these estimates.

The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the Company’s financial condition and results of operations and that require significant judgments and estimates. Management believes the Company’s most critical accounting policies at the end of fiscal 2024 relate to the valuation of inventories and accounting for income taxes.

Valuation of Inventories

Inventories are recorded at the lower of cost or estimated net realizable value. Inventory cost includes the purchase price of finished goods and any freight cost incurred to receive the inventory into the Company’s distribution centers. The Company’s inventories include electronic components sold into changing, cyclical, and competitive markets, so inventories may decline in market value or become obsolete.

The Company regularly evaluates inventories for expected customer demand, obsolescence, current market prices, and other factors that may render inventories less marketable. Write-downs are recorded so that inventories reflect the estimated net realizable value and take into account the Company’s contractual provisions with its suppliers, which may provide certain protections to the Company for product obsolescence and price erosion in the form of rights of return, stock rotation rights, obsolescence allowances, industry specific supplier rebate programs and price protections. Because of the large number of products and suppliers and the complexity of managing the process around price protections, supplier rebate programs and stock rotations, estimates are made regarding the net realizable value of inventories. Additionally, assumptions about future demand and market conditions, as well as decisions to discontinue certain product lines, impact the evaluation of whether to write-down inventories. If future demand changes or actual market conditions are less favorable than assumed, then management evaluates whether additional write-downs of inventories are required. In any case, actual net realizable values could be different from those currently estimated.

Accounting for Income Taxes

Management’s judgment is required in determining income tax expense, unrecognized tax benefit liabilities, deferred tax assets and liabilities, and valuation allowances recorded against net deferred tax assets. Recovering net deferred tax assets depends on the Company’s ability to generate sufficient future taxable income in certain jurisdictions. In addition, when assessing the need for valuation allowances, the Company considers historic levels and types of income, expectations and risk associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies. If the Company determines that it cannot realize all or part of its deferred tax assets in the future, it may record additional valuation allowances against the deferred tax assets with a corresponding increase to income tax expense in the period such determination is made. Similarly, if the Company determines that it can realize all or part of its deferred tax assets that have an associated valuation allowance established, the Company may release a valuation allowance with a corresponding benefit to income tax expense in the period such determination is made.

The Company establishes contingent liabilities for potentially unfavorable outcomes of positions taken on certain tax matters. These liabilities are based on management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The anticipated and actual outcomes of these matters may differ, which

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may result in changes in estimates to such unrecognized tax benefit liabilities. To the extent such changes in estimates are necessary, the Company’s effective tax rate may fluctuate. In accordance with the Company’s accounting policy, accrued interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.

In determining the Company’s income tax expense, management considers current tax regulations in the numerous jurisdictions in which it operates, including the impact of tax law and regulation changes in the jurisdictions the Company operates in. The Company exercises judgment for interpretation and application of such current tax regulations. Changes to such tax regulations or disagreements with the Company’s interpretation or application by tax authorities in any of the Company’s major jurisdictions may have a significant impact on the Company’s income tax expense.

See Note 9, “Income taxes” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on income tax expense, valuation allowances and unrecognized tax benefits.

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Recently Issued Accounting Pronouncements

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Tax Disclosures (“ASU No. 2023-09”), which updates income tax disclosures related to the effective income tax rate reconciliation and requires disclosure of income taxes paid by jurisdiction. ASU No. 2023-09 also provides further disclosure comparability. ASU No. 2023-09 will be effective for the Company in fiscal year 2026 and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU No. 2023-09 on its disclosures.

In November 2023, the FASB issued ASU No. 2023-07, Segment reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU No. 2023-07”) which improves segment disclosure requirements, primarily through increased disclosures about significant segment expenses. ASU No. 2023-07 will be effective for the Company in fiscal year 2025, and interim periods beginning in fiscal year 2026 with early adoption permitted. The Company is currently evaluating the impact of adopting ASU No. 2023-07 on its disclosures.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For a description of the Company’s critical accounting policies and an understanding of Avnet and the significant factors that influenced the Company’s performance during the past three fiscal years, the following discussion should be read in conjunction with the description of the business appearing in Item 1 of this Report and the consolidated financial statements, including the related notes and schedule, and other information appearing in Item 8 of this Report. The Company operates on a “52/53 week” fiscal year. Fiscal 2023 and fiscal 2022 contain 52 weeks compared to 53 weeks in fiscal 2021.

The discussion of the Company’s results of operations includes references to the impact of foreign currency translation. When the U.S. Dollar strengthens and the stronger exchange rates are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the result is a decrease in U.S. Dollars of reported results. Conversely, when the U.S. Dollar weakens, the weaker exchange rates result in an increase in U.S. Dollars of reported results. In the discussion that follows, results excluding this impact, primarily for subsidiaries in EMEA and Asia, are referred to as “constant currency.”

In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the U.S. (“GAAP”), the Company also discloses certain non-GAAP financial information, including:

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The reconciliation of operating income to adjusted operating income is presented in the following table:

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Management believes that providing this additional information is useful to financial statement users to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods, primarily because management typically monitors the business both including and excluding these adjustments to GAAP results. Management also uses these non-GAAP measures to establish operational goals and, in many cases, for measuring performance for compensation purposes. However, any analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, results presented in accordance with GAAP.

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Results of Operations

Executive Summary

Sales for fiscal 2023 were $26.54 billion, an increase of 9.2% from fiscal 2022 sales of $24.31 billion. Excluding the impact of changes in foreign currency, sales increased 13.4% as compared to sales in the prior year. This increase in sales was predominately driven by sales growth in both operating groups across all regions driven by strong global demand and to a lesser extent pricing for electronic components.

Gross profit increased $216.8 million or 7.3% from fiscal 2022 gross profit due primarily to increases in sales. Gross profit margin of 12.0% decreased 21 basis points compared to 12.2% in fiscal 2022. This decrease is primarily driven by the unwinding of certain pricing premiums in the Farnell business.

Operating income of $1.19 billion was $247.8 million or 26.4% higher than fiscal 2022. Operating income margin was 4.5% in fiscal 2023, as compared to 3.9% in fiscal 2022. The increase in operating income margin is primarily the result of increases in sales and the operating leverage created by the additional gross profit dollars without any meaningful increase in selling, general and administrative expenses. Adjusted operating income margin was 4.6% in fiscal 2023 as compared to 4.1% in fiscal 2022, an increase of 55 basis points. This increase in adjusted operating income margin is primarily due to increases in sales and the operating leverage created by the additional gross profit dollars.

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Sales

Three-Year Analysis of Sales: By Operating Group and Geography

The table below provides a year-over-year summary of sales for the Company and its operating groups.

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The table below provides reported and organic sales growth rates for fiscal 2023 as compared to fiscal 2022 by geographic region and operating group.

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Avnet’s sales for fiscal 2023 were $26.54 billion, an increase of $2.23 billion, or 9.2%, from fiscal 2022 sales of $24.31 billion. Sales in constant currency increased 13.4% year over year, reflecting sales growth in both operating groups across all regions driven by strong global demand and to a lesser extent pricing for electronic components.

EC sales in fiscal 2023 were $24.80 billion, representing a 10.2% increase over fiscal 2022 sales of $22.50 billion. EC sales increased 14.4% year over year in constant currency. The increase in EC sales is primarily due to double-digit growth in the Americas and EMEA regions driven primarily by strong demand in the industrial, transportation, and aerospace and defense sectors.

Farnell sales in fiscal 2023 were $1.73 billion, a decrease of $73.0 million or 4.0%, from fiscal 2022 sales of $1.81 billion. The year-over-year decrease in sales was primarily a result of foreign currency translation from a strengthening U.S. Dollar. Farnell sales in constant currency increased 0.9% year over year as sales growth in the Americas was offset by sales declines in the EMEA and Asia regions.

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Gross Profit

Gross profit in fiscal 2023 was $3.18 billion, an increase of $216.8 million, or 7.3%, from fiscal 2022 gross profit of $2.97 billion. Gross profit margin decreased to 12.0% in fiscal 2023 or 21 basis points from fiscal 2022 gross profit margin of 12.2%. EC gross profit margin increased year over year primarily due to a higher percentage of sales coming from the higher-margin western regions. Sales in the higher margin western regions represented approximately 60% of sales in fiscal 2023 as compared to 56% during fiscal 2022. Farnell gross profit margin decreased year over year primarily driven by the unwinding of certain component pricing premiums during fiscal 2023 and from unfavorable sales mix of lower margin products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A expenses”) in fiscal 2023 were $1.97 billion, a decrease of $27.5 million, or 1.4%, from fiscal 2022. The year-over-year decrease in SG&A expenses was primarily a result of foreign currency translation from a strengthening U.S. Dollar.

Metrics that management monitors with respect to its operating expenses are SG&A expenses as a percentage of sales and as a percentage of gross profit. In fiscal 2023, SG&A expenses as a percentage of sales were 7.4% and as a percentage of gross profit were 61.8%, as compared with 8.2% and 67.3%, respectively, in fiscal 2022. The decreases in SG&A expenses as a percentage of sales and gross profit resulted primarily from the operating leverage realized with higher sales, and lower amortization expenses, partially offset by increases in SG&A expenses to support sales volumes.

Russian-Ukraine Conflict Related Expenses

During fiscal 2022, the Company incurred $26.3 million of costs associated with the Russian-Ukraine conflict, primarily comprised of $17.2 million of expense for credit loss reserves for trade accounts receivable from Russian customers that are no longer considered collectible. The remaining expense is related to product write-downs for Russia based customers and other Russian business operation wind-down costs.

Restructuring, Integration and Other Expenses

During fiscal 2023, the Company incurred restructuring, integration and other expenses primarily related to the planned closure of a distribution center. In addition, the Company increased its estimated environmental remediation reserves associated with certain legacy manufacturing operations that were divested several decades ago. As a result, during fiscal 2023 the Company recorded restructuring, integration, and other expenses of $28.0 million. The Company recorded $17.4 million for restructuring costs consisting of $16.1 million for severance, $0.5 million for facility exit costs and $0.8 million for asset impairments. The Company expects to realize approximately $16.0 million in incremental annualized operating costs savings as a result of such restructuring actions once completed. Integration and other costs were $2.6 million associated with incremental costs incurred as a result of the planned distribution center closure and $8.0 million related to the Company’s estimated environmental remediation obligations, respectively. The after-tax impact of restructuring, integration and other expenses was $22.0 million and $0.24 per share on a diluted basis.

During fiscal 2022, the Company recorded restructuring, integration and other expenses of $5.3 million, substantially all of which was related to integration costs.

See Note 17, “Restructuring expenses” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information related to restructuring expenses.

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Operating Income

Operating income for fiscal 2023 was $1.19 billion, an increase of $247.8 million or 26.4%, from fiscal 2022 operating income of $939.0 million. The year-over-year increase in operating income is primarily driven by the increase in sales and lower SG&A expenses, partially offset by a lower gross profit margin.

Operating income margin was 4.5% in fiscal 2023 compared to 3.9% in fiscal 2022. Adjusted operating income for fiscal 2023 was $1.22 billion, an increase of $235.3 million or 23.9%, from fiscal 2022. Adjusted operating income margin was 4.6% in fiscal 2023 compared to 4.1% in fiscal 2022. EC operating income margin was 4.8% in fiscal 2023 compared to 3.9% in fiscal 2022. Farnell operating income margin was 9.5% in fiscal 2023 compared to 13.4% in fiscal 2022.

Interest and Other Financing Expenses, Net

Interest and other financing expenses for fiscal 2023 was $250.9 million, an increase of $150.5 million, or 149.9%, compared with interest and other financing expenses of $100.4 million in fiscal 2022. The increase in interest and other financing expenses in fiscal 2023 compared to fiscal 2022 is a result of higher outstanding borrowings and increases in average borrowing rates during fiscal 2023 as compared to fiscal 2022.

Gain on Legal Settlements and Other

During fiscal 2023, the Company recorded a gain on legal settlements of $74.4 million before tax, $56.9 million after tax, and $0.61 per share on a diluted basis, in connection with the settlement of claims filed against certain manufacturers of capacitors. See Note 13, “Commitments and contingencies” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information related to the gain on legal settlements.

In June 2023, the Company settled a portion of its pension liability related to certain retirees and terminated vested employees in the Company’s U.S. pension plan as part of a de-risking strategy. This strategy triggered settlement accounting which required immediate recognition of a portion of the accumulated losses associated with the plan. Consequently, the Company recognized non-cash settlement expense of $37.4 million in fiscal 2023.

Income Tax

The below discussion of the effective tax rate for the periods presented in the statements of operations is in comparison to the 21% U.S. statutory federal income tax rate.

Avnet’s effective tax rate on its income before income taxes was 21.6% in fiscal 2023. The effective tax rate for fiscal 2023 was unfavorably impacted primarily by (i) U.S. state taxes, (ii) increases to valuation allowances against deferred tax assets, and (iii) the mix of income in higher income tax jurisdictions, partially offset by (iv) the impact of foreign currency translation loss.

For fiscal 2022, the Company’s effective tax rate on its income before income taxes was 16.9%. The effective tax rate for fiscal 2022 was favorably impacted primarily by decreases to valuation allowances against deferred tax assets.

See Note 9, “Income taxes” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on the effective tax rate.

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Net Income

As a result of the factors described in the preceding sections of this MD&A, the Company’s net income in fiscal 2023 was $770.8 million, or earnings per share on a diluted basis of $8.26, compared with fiscal 2022 net income of $692.4 million, or earnings per share on a diluted basis of $6.94.

Liquidity and Capital Resources

Cash Flows

Cash Flows from Operating Activities

The Company used $713.7 million of cash from its operating activities in fiscal 2023 as compared to $219.3 million of cash used in fiscal 2022. These operating cash flows are comprised of: (i) cash flows generated from net income, adjusted for the impact of non-cash and other items, which includes depreciation and amortization expense, deferred income taxes, stock-based compensation expense, amortization of operating lease assets and other non-cash items, and (ii) cash flows used for, or generated from, working capital and other, excluding cash and cash equivalents. Cash used for working capital and other to support sales growth was $1.68 billion during fiscal 2023, including increases in accounts receivable of $461.1 million and inventories of $1.17 billion, and a decrease in accounts payable of $75.9 million, offset by an increase in accrued expenses and other of $28.8 million. Comparatively, cash used for working capital and other was $1.09 billion during fiscal 2022, including increases in accounts receivable of $1.13 billion and inventories of $1.22 billion, offset by increases in accounts payable of $1.13 billion, and accrued expenses and other of $134.4 million.

Cash Flows from Financing Activities

During fiscal 2023, the Company received net proceeds of $498.6 million as a result of the issuance of $500.0 million of 6.25% Notes due March 2028, $728.2 million under the Credit Facility, and $258.0 million under the Securitization Program, and repaid $96.2 million under other short-term debt. During fiscal 2023, the Company paid dividends on common stock of $106.3 million, and repurchased $221.7 million of common stock.

During fiscal 2022, the Company received net proceeds of $300.0 million as a result of the issuance of $300.0 million of 5.50% Notes due May 2032, $274.9 million under the Securitization Program, and $235.0 million from borrowings of various bank credit facilities. During fiscal 2022, the Company repaid $354.3 million of notes, paid dividends on common stock of $98.5 million, and repurchased $184.4 million of common stock.

Cash Flows from Investing Activities

During fiscal 2023, the Company used $194.7 million for capital expenditures compared to $48.9 million in fiscal 2022. The increase in capital expenditures year over year was primarily related to expenditures for a new distribution center being built in EMEA to support the future growth of the EC EMEA business. During fiscal 2023, the Company used $16.9 million for other investing activities. During fiscal 2022, the Company received $90.4 million from investing activities related to the liquidation of Company owned life insurance policies.

Financing Transactions

The Company uses a variety of financing arrangements, both short-term and long-term, to fund its operations in addition to historical cash generated from operating activities. The Company also uses several funding sources to avoid becoming overly dependent on one financing source, and to lower overall funding costs. These financing arrangements

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include public debt (“Notes”), short-term and long-term bank loans, a revolving credit facility (the “Credit Facility”), and an accounts receivable securitization program (the “Securitization Program”).

The Company has various lines of credit, financing arrangements, and other forms of bank debt in the U.S. and various foreign locations to fund the short-term working capital, foreign exchange, overdraft, and letter of credit needs of its wholly owned subsidiaries. Outstanding borrowings under such forms of debt at the end of fiscal 2023 was $70.6 million.

As an alternative form of liquidity outside of the United States, the Company sells certain of its trade accounts receivable on a non-recourse basis to financial institutions pursuant to factoring agreements. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the consolidated statements of cash flows. Factoring fees for the sales of trade accounts receivable are recorded within “Interest and other financing expenses, net” and were not material to the consolidated financial statements.

See Note 7, “Debt” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information on financing transactions including the Credit Facility, the Securitization Program and the outstanding Notes as of July 1, 2023.

Covenants and Conditions

The Company’s Credit Facility contains certain covenants with various limitations on debt incurrence, share repurchases, dividends, investments and capital expenditures, and also includes financial covenant requiring the Company to maintain a leverage ratio below a certain threshold. The Company was in compliance with all such covenants as of July 1, 2023.

The Company’s Securitization Program contains certain covenants relating to the quality of the receivables sold. If these conditions are not met, the Company may not be able to borrow any additional funds and the financial institutions may consider this an amortization event, as defined in the Securitization Program agreements, which would permit the financial institutions to liquidate the accounts receivables sold to cover any outstanding borrowings. Circumstances that could affect the Company’s ability to meet the required covenants and conditions of the Securitization Program include the Company’s ongoing profitability and various other economic, market, and industry factors. The Company was in compliance with all such covenants as of July 1, 2023.

Management does not believe that the covenants under the Credit Facility or Securitization Program limit the Company’s ability to pursue its intended business strategy or its future financing needs.

See Liquidity below for further discussion of the Company’s availability under these various facilities.

Liquidity

The Company had cash and cash equivalents of $288.2 million as of July 1, 2023, of which $194.5 million was held outside the United States. As of July 2, 2022, the Company had cash and cash equivalents of $153.7 million, of which $60.4 million was held outside of the United States.

During periods of weakening demand in the electronic components industry, the Company typically generates cash from operating activities. Conversely, the Company will use cash for working capital requirements during periods of higher growth. The Company used $713.7 million in cash flows for operating activities during the fiscal year ended July 1, 2023, to support the fiscal 2023 sales growth.

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Liquidity is subject to many factors, such as normal business operations and general economic, financial, competitive, legislative, and regulatory factors that are beyond the Company’s control. To the extent the cash balances held in foreign locations cannot be remitted back to the U.S. in a tax efficient manner, those cash balances are generally used for ongoing working capital, including the need to purchase inventories, capital expenditures and other foreign business needs. In addition, local government regulations may restrict the Company’s ability to move funds among various locations under certain circumstances. Management does not believe such restrictions would limit the Company’s ability to pursue its intended business strategy.

As of July 1, 2023, there were $796.6 million of borrowings outstanding under the Credit Facility and $0.9 million in letters of credit issued, and $555.8 million outstanding under the Securitization Program. During fiscal 2023, the Company had an average daily balance outstanding under the Credit Facility of approximately $1.13 billion and $549.1 million under the Securitization Program. As of July 1, 2023, the combined availability under the Credit Facility and the Securitization Program was $846.7 million. Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable in the United States to support desired borrowings.

The Company has the following contractual obligations outstanding as of July 1, 2023 (in millions):

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The Company purchases inventories in the normal course of business throughout the year through the issuance of purchase orders to suppliers. During fiscal 2023, the Company’s cost of sales, substantially all of which related to the underlying purchase of inventories was $23.4 billion and the Company had $5.5 billion of inventories as of July 1, 2023. The Company expects to continue to purchase sufficient inventory to meet its customers’ demands in fiscal year 2024, some of which relates to outstanding purchase orders at the end of fiscal 2023. Outstanding purchase orders with suppliers may be non-cancellable/non-returnable at the point such orders are issued, or may become non-cancellable at some point in the future, typically within 30 days to 90 days from the requested delivery date of inventories.

At July 1, 2023, the Company had an estimated liability for income tax contingencies of $130.5 million, which is not included in the above table. Cash payments associated with the settlement of these liabilities that are expected to be paid within the next 12 months is $1.0 million. The settlement period for the remaining amount of the unrecognized tax benefits, including related accrued interest and penalties, cannot be determined, and therefore was not included in the table.

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As of July 1, 2023, the Company may repurchase up to an aggregate of $318.5 million of shares of the Company’s common stock through the share repurchase program approved by the Board of Directors. The Company may repurchase stock from time to time at the discretion of management, subject to strategic considerations, market conditions including share price and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. During fiscal 2023, the Company repurchased $212.8 million of common stock.

The Company has historically paid quarterly cash dividends on shares of its common stock, and future dividends are subject to approval by the Board of Directors. During the fourth quarter of fiscal 2023, the Board of Directors approved a dividend of $0.29 per share, which resulted in $26.5 million of dividend payments during the quarter.

The Company continually monitors and reviews its liquidity position and funding needs. Management believes that the Company’s ability to generate operating cash flows through the liquidation of working capital in the future and available borrowing capacity, including capacity for the non-recourse sale of trade accounts receivable, will be sufficient to meet its future liquidity needs. Additionally, the Company believes that it has sufficient access to additional liquidity from the capital markets if necessary.

Critical Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. These estimates and assumptions are based upon the Company’s continual evaluation of available information, including historical results and anticipated future events. Actual results may differ materially from these estimates.

The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the Company’s financial condition and results of operations and that require significant judgments and estimates. Management believes the Company’s most critical accounting policies at the end of fiscal 2023 relate to:

Valuation of Inventories

Inventories are recorded at the lower of cost or estimated net realizable value. Inventory cost includes the purchase price of finished goods and any freight cost incurred to receive the inventory into the Company’s distribution centers. The Company’s inventories include electronic components sold into changing, cyclical, and competitive markets, so inventories may decline in market value or become obsolete.

The Company regularly evaluates inventories for expected customer demand, obsolescence, current market prices, and other factors that may render inventories less marketable. Write-downs are recorded so that inventories reflect the estimated net realizable value and take into account the Company’s contractual provisions with its suppliers, which may provide certain protections to the Company for product obsolescence and price erosion in the form of rights of return, stock rotation rights, obsolescence allowances, industry specific supplier rebate programs and price protections. Because of the large number of products and suppliers and the complexity of managing the process around price protections, supplier rebate programs and stock rotations, estimates are made regarding the net realizable value of inventories. Additionally, assumptions about future demand and market conditions, as well as decisions to discontinue certain product lines, impact the evaluation of whether to write-down inventories. If future demand changes or actual market conditions are less favorable than assumed, then management evaluates whether additional write-downs of inventories are required. In any case, actual net realizable values could be different from those currently estimated.

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Accounting for Income Taxes

Management’s judgment is required in determining income tax expense, unrecognized tax benefit liabilities , deferred tax assets and liabilities, and valuation allowances recorded against net deferred tax assets. Recovering net deferred tax assets depends on the Company’s ability to generate sufficient future taxable income in certain jurisdictions. In addition, when assessing the need for valuation allowances, the Company considers historic levels and types of income, expectations and risk associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies. If the Company determines that it cannot realize all or part of its deferred tax assets in the future, it may record additional valuation allowances against the deferred tax assets with a corresponding increase to income tax expense in the period such determination is made. Similarly, if the Company determines that it can realize all or part of its deferred tax assets that have an associated valuation allowance established, the Company may release a valuation allowance with a corresponding benefit to income tax expense in the period such determination is made.

The Company establishes contingent liabilities for potentially unfavorable outcomes of positions taken on certain tax matters. These liabilities are based on management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The anticipated and actual outcomes of these matters may differ, which may result in changes in estimates to such unrecognized tax benefit liabilities. To the extent such changes in estimates are necessary, the Company’s effective tax rate may fluctuate. In accordance with the Company’s accounting policy, accrued interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.

In determining the Company’s income tax expense, management considers current tax regulations in the numerous jurisdictions in which it operates, including the impact of tax law and regulation changes in the jurisdictions the Company operates in. The Company exercises judgment for interpretation and application of such current tax regulations. Changes to such tax regulations or disagreements with the Company’s interpretation or application by tax authorities in any of the Company’s major jurisdictions may have a significant impact on the Company’s income tax expense.

See Note 9, “Income taxes” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on income tax expense, valuation allowances and unrecognized tax benefits.

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Recently Issued Accounting Pronouncements

In September 2022, the FASB issued ASU No. 2022-04, Liabilities (subtopic 405-50): Supplier Finance Programs (“ASU No. 2022-04”) to enhance the transparency of certain supplier finance programs to allow financial statement users to understand the effect on working capital, liquidity and cash flows. The new pronouncement requires qualitative and quantitative disclosure sufficient to enable users of the financial statements to understand the nature, activity during the period, changes from period to period and potential magnitude of such programs. The Company plans to adopt this guidance in the first quarter of fiscal 2024, except for the amendment on roll-forward information, which is effective in fiscal 2025. The Company’s planned adoption of ASU No. 2022-04 is not expected to have a material impact on the Company’s consolidated financial statements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For a description of the Company’s critical accounting policies and an understanding of Avnet and the significant factors that influenced the Company’s performance during the past three fiscal years, the following discussion should be read in conjunction with the description of the business appearing in Item 1 of this Report and the consolidated financial statements, including the related notes and schedule, and other information appearing in Item 8 of this Report. The Company operates on a “52/53 week” fiscal year. Fiscal 2022 contains 52 weeks compared to 53 weeks in fiscal 2021 and 52 weeks in fiscal 2020. The extra week, which occurred in the first quarter of fiscal 2021, impacts the year-over-year analysis in this MD&A.

The discussion of the Company’s results of operations includes references to the impact of foreign currency translation. When the U.S. Dollar strengthens and the stronger exchange rates are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the result is a decrease in U.S. Dollars of reported results. Conversely, when the U.S. Dollar weakens, the weaker exchange rates result in an increase in U.S. Dollars of reported results. In the discussion that follows, results excluding this impact, primarily for subsidiaries in EMEA and Asia, are referred to as “constant currency.”

In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the U.S. (“GAAP”), the Company also discloses certain non-GAAP financial information, including:

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The reconciliation of operating income (loss) to adjusted operating income is presented in the following table:

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Management believes that providing this additional information is useful to financial statement users to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods, primarily because management typically monitors the business both including and excluding these adjustments to GAAP results. Management also uses these non-GAAP measures to establish operational goals and, in many cases, for measuring performance for compensation purposes. However, any analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, results presented in accordance with GAAP.

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Results of Operations

Recent Global Events and Uncertainties

In February 2022, Russian forces invaded Ukraine (“Russian-Ukraine conflict”), and in response, the member countries of NATO initiated a variety of sanctions and export controls targeting Russia and associated entities. The sanctions currently in place limit the Company’s ability to provide goods to Russian customers and banking sanctions significantly negate our ability to collect outstanding receivables; as such, the Company has recorded an allowance for credit losses against those receivables that are not covered by customer credit insurance as of July 2, 2022. Historically, the Company’s sales and gross profit generated from sales to Russian customers is less than 1% of consolidated sales and consolidated gross profit. See further discussion of the impacts of the Russian-Ukraine conflict on the Company’s results of operations in fiscal 2022 below.

Executive Summary

Sales for fiscal 2022 were $24.31 billion, an increase of 24.5% from fiscal 2021 sales of $19.53 billion. Excluding the impact of changes in foreign currency, sales increased 27.2% as compared to sales in the prior year. This increase in sales was predominately driven by sales growth in both operating groups across all regions driven by strong demand and pricing globally for electronic components.

Gross profit margin of 12.2% increased 73 basis points compared to 11.5% in fiscal 2021. This increase is primarily due to strong overall demand for electronic components and improvements in pricing, product, customer mix, and geographic sales mix.

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Operating income of $939.0 million was $657.6 million higher than fiscal 2021. Operating income margin was 3.9% in fiscal 2022, as compared to 1.4% in fiscal 2021. The increase in operating income margin is the result of increases in sales and in gross profit margin, partially offset by an increase in selling, general and administrative expenses to support sales growth. Adjusted operating income margin was 4.1% in fiscal 2022 as compared to 2.1% in fiscal 2021, an increase of 197 basis points. This increase in adjusted operating income margin is primarily due to the increases in sales and gross profit margin, partially offset by increases in selling, general and administrative expenses to support sales growth.

Sales

Three-Year Analysis of Sales: By Operating Group and Geography

The table below provides a year-over-year summary of sales for the Company and its operating groups.

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Reported sales were the same as organic sales in fiscal 2022. The table below provides the reconciliation of reported sales to organic sales for fiscal 2021 by region and operating group.

(1)The impact of the additional week of sales in the first quarter of fiscal 2021 is estimated.

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The table below provides reported and organic sales growth rates for fiscal 2022 as compared to fiscal 2021 by region and operating group.

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Avnet’s sales for fiscal 2022 were $24.31 billion, an increase of $4.78 billion, or 24.5%, from fiscal 2021 sales of $19.53 billion. Organic sales in constant currency increased 29.2% year over year, reflecting sales growth in both operating groups across all regions driven by strong demand and pricing globally for electronic components.

EC sales in fiscal 2022 were $22.50 billion, representing a 24.8% increase over fiscal 2021 sales. EC organic sales in constant currency increased 29.6% year over year reflecting sales growth in all three regions. The increase in sales in the Company’s EC operating group is primarily due to overall stronger market demand and pricing for electronic components, especially in the transportation and industrial sectors.

Farnell sales in fiscal 2022 were $1.81 billion, an increase of $303.2 million or 20.2% from fiscal 2021 sales of $1.50 billion. Sales in constant currency increased 22.2% year over year. These increases were primarily a result of increased market demand and pricing for the products that Farnell sells.

As a result of the termination of the Company’s distribution agreement between Maxim Integrated Products, Inc. (“Maxim”) and the Electronic Components operating group, the Company may experience lower sales and gross profit in the future if the impact of the termination is not offset by sales growth, gross margin improvements or operating cost reductions. Sales from Maxim products represented less than 3% of total sales in fiscal 2022.

Gross Profit and Gross Profit Margin

Gross profit in fiscal 2022 was $2.97 billion, an increase of $724.8 million, or 32.4%, from fiscal 2021 gross profit of $2.24 billion. Gross profit margin increased to 12.2% in fiscal 2022 or 73 basis points from fiscal 2021 gross profit margin of 11.5%, driven by increases in gross profit margin in both operating groups. Sales in the higher margin western regions represented approximately 56% of sales in fiscal 2022 as compared to 55% during fiscal 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A expenses”) in fiscal 2022 were $1.99 billion, an increase of $120.0 million, or 6.4%, from fiscal 2021. The year-over-year increase in SG&A expenses was primarily due to

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increases in costs to support sales growth and to a lesser extent increased costs related to inflation, partially offset by lower expenses due to foreign currency translation from the strengthening of the U.S. Dollar.

Metrics that management monitors with respect to its operating expenses are SG&A expenses as a percentage of sales and as a percentage of gross profit. In fiscal 2022, SG&A expenses as a percentage of sales were 8.2% and as a percentage of gross profit were 67.3%, as compared with 9.6% and 83.7%, respectively, in fiscal 2021. The decrease in SG&A expenses as a percentage of gross profit is primarily due to the operating leverage created from higher sales, increases in gross profit margin, and lower amortization expense, partially offset by increases in SG&A expenses primarily to support sales volumes.

Russian-Ukraine Conflict Related Expenses

The Company incurred $26.3 million of costs associated with the Russian-Ukraine conflict in the third quarter of fiscal 2022, primarily comprised of $17.2 million of expense for credit loss reserves for trade accounts receivable from Russian customers that are no longer considered collectible. The remaining expense is primarily related to product write-downs for Russia based customers and other Russian business operation wind-down costs.

Restructuring, Integration and Other Expenses

During fiscal 2022, the Company recorded restructuring, integration and other expenses of $5.3 million, substantially all of which was related to integration costs.

During fiscal 2021, the Company recorded restructuring, integration and other expenses of $84.4 million consisted of restructuring cost of $59.4 million, integration costs of $35.8 million, offset by a gain on legal settlement of $8.2 million, and a reversal of $2.6 million for changes in estimates for costs associated with prior year restructuring actions.

See Note 17, “Restructuring expenses” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information related to restructuring expenses.

Operating Income

Operating income for fiscal 2022 was $939.0 million, an increase of $657.6 million, from fiscal 2021 operating income of $281.4 million. Operating income margin was 3.9% in fiscal 2022 compared to 1.4% in fiscal 2021. Adjusted operating income for fiscal 2022 was $985.6 million, an increase of $578.5 million or 142.1%, from fiscal 2021. Adjusted operating income margin was 4.1% in fiscal 2022 compared to 2.1% in fiscal 2021. The year-over-year increase in adjusted operating income and adjusted operating income margin was primarily driven by the increase in sales and in gross profit margin and lower amortization expense.

Interest and Other Financing Expenses, Net and Other Expense, Net

Interest and other financing expenses for fiscal 2022 was $100.4 million, an increase of $10.9 million, or 12.2%, compared with interest and other financing expenses of $89.5 million in fiscal 2021. The increase in interest and other financing expenses in fiscal 2022 compared to fiscal 2021 was primarily a result of higher outstanding borrowings during fiscal 2022 as compared to fiscal 2021.

In fiscal 2022, the Company had $5.3 million of other expense as compared with $19.0 million of other expense in fiscal 2021. The year-over-year differences in other expense was primarily due to an equity investment impairment expense included in the other expense in the first quarter of fiscal 2021, and differences in foreign currency exchange rates between fiscal 2022 and fiscal 2021.

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Income Tax Expense

Avnet’s effective tax rate on its income before income taxes was 16.9% in fiscal 2022. The effective tax rate for fiscal 2022 was favorably impacted primarily by decreases to valuation allowances against deferred tax assets.

For fiscal 2021, the Company’s effective tax rate on its income before income taxes was a benefit of 11.7%. The effective tax rate for fiscal 2021 was favorably impacted primarily by (i) a tax benefit arising from the reduction in fair value of certain businesses, resulting in losses that can be carried back under U.S. tax law and, (ii) the mix of income in lower tax jurisdictions, partially offset by (iii) increases to unrecognized tax benefit reserves.

See Note 9, “Income taxes” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on the effective tax rate.

Net Income

As a result of the factors described in the preceding sections of this MD&A, the Company’s net income in fiscal 2022 was $692.4 million, or earnings per share on a diluted basis of $6.94, compared with fiscal 2021 net income of $193.1 million, or earnings per share on a diluted basis of $1.93.

Fiscal 2021 Comparison to Fiscal 2020

For comparison of the Company’s results of operations between fiscal 2021 and fiscal 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021 filed with the SEC on August 13, 2021.

Liquidity and Capital Resources

Cash Flows

Cash Flows from Operating Activities

The Company used $219.3 million of cash from its operating activities in fiscal 2022 as compared to $90.9 million of cash generated in fiscal 2021. These operating cash flows are comprised of: (i) cash flows generated from net income, adjusted for the impact of non-cash and other items, which includes depreciation and amortization expense, deferred income taxes, stock-based compensation expense, amortization of operating lease assets and other non-cash items, and (ii) cash flows used for, or generated from, working capital and other, excluding cash and cash equivalents. Cash used for working capital and other to support sales growth was $1.09 billion during fiscal 2022, including increases in accounts receivable of $1.13 billion and inventories of $1.22 billion, offset by increases in accounts payable of $1.13 billion and accrued expenses and other of $134.4 million. Comparatively, cash used for working capital and other was $372.5 million during fiscal 2021, including increases in accounts receivable of $615.4 million and inventories of $409.1 million, offset by increases in accounts payable of $621.0 million and accrued expenses and other of $30.9 million.

Cash Flows from Financing Activities

During fiscal 2022, the Company received net proceeds of $300.0 million as a result of the issuance of $300.0 million of 5.50% Notes due May 2032, $274.9 million under the Securitization Program, and $235.0 million from borrowings of various bank credit facilities. During fiscal 2022, the Company repaid $354.3 million of notes, paid dividends on common stock of $98.5 million, and repurchased $184.4 million of common stock.

During fiscal 2021, the Company received net proceeds of $297.7 million as a result of the issuance of $300.0

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million of 3.00% Notes due May 2031 and $22.9 million under the Securitization Program. During fiscal 2021, the Company repaid $305.1 million of notes and $231.7 million under the Credit Facility, and paid dividends on common stock of $84.3 million.

Cash Flows from Investing Activities

During fiscal 2022, the Company used $48.9 million for capital expenditures primarily related to warehouse and facilities, and information technology hardware and software costs compared to $50.4 million in fiscal 2021. During fiscal 2022, the Company received $90.4 million from investing activities related to the liquidation of Company owned life insurance policies. During fiscal 2021, the Company used $18.4 million of cash for acquisitions, which is net of the cash acquired.

Financing Transactions

The Company uses a variety of financing arrangements, both short-term and long-term, to fund its operations in addition to cash generated from operating activities. The Company also uses several funding sources to avoid becoming overly dependent on one financing source, and to lower funding costs. These financing arrangements include public debt, short-term and long-term bank loans, a revolving credit facility (the “Credit Facility”), and an accounts receivable securitization program (the “Securitization Program”).

The Company has various lines of credit, financing arrangements and other forms of bank debt in the U.S. and various foreign locations to fund working capital including purchases of inventories, foreign exchange, overdraft, and letter of credit needs of its wholly owned subsidiaries. Outstanding borrowings under such forms of debt at the end of fiscal 2022 was $174.6 million.

As an alternative form of financing outside of the United States, the Company sells certain of its trade accounts receivable on a non-recourse basis to third-party financial institutions pursuant to factoring agreements. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the consolidated statements of cash flows. Factoring fees for the sales of trade accounts receivables are recorded within “Interest and other financing expenses, net” and are not material.

See Note 7, “Debt” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information on financing transactions including the Credit Facility, the Securitization Program and the outstanding Notes as of July 2, 2022.

Covenants and Conditions

The Company’s Credit Facility contains certain covenants with various limitations on debt incurrence, share repurchases, dividends, investments and capital expenditures, and also includes financial covenants requiring the Company to maintain minimum interest coverage and leverage ratios. The Company was in compliance with all such covenants as of July 2, 2022.

The Company’s Securitization Program contains certain covenants relating to the quality of the receivables sold. If these conditions are not met, the Company may not be able to borrow any additional funds and the financial institutions may consider this an amortization event, as defined in the Securitization Program agreements, which would permit the financial institutions to liquidate the accounts receivables sold to cover any outstanding borrowings. Circumstances that could affect the Company’s ability to meet the required covenants and conditions of the Securitization Program include the Company’s ongoing profitability and various other economic, market, and industry factors. The Company was in

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compliance with all such covenants as of July 2, 2022.

Management does not believe that the covenants under the Credit Facility or Securitization Program limit the Company’s ability to pursue its intended business strategy or its future financing needs.

See Liquidity below for further discussion of the Company’s availability under these various facilities.

Liquidity

The Company had cash and cash equivalents of $153.7 million as of July 2, 2022, of which $60.4 million was held outside the United States. As of July 3, 2021, the Company had cash and cash equivalents of $199.7 million, of which $150.5 million was held outside of the United States.

During periods of weakening demand in the electronic components industry, the Company typically generates cash from operating activities. Conversely, the Company is more likely to use operating cash flows for working capital requirements during periods of higher growth. The Company used $219.3 million in cash flows for operating activities during the fiscal year ended July 2, 2022, to support the fiscal 2022 sales growth.

Liquidity is subject to many factors, such as normal business operations and general economic, financial, competitive, legislative, and regulatory factors that are beyond the Company’s control. To the extent the cash balances held in foreign locations cannot be remitted back to the U.S. in a tax efficient manner, those cash balances are generally used for ongoing working capital, including the need to purchase inventories, capital expenditures and other foreign business needs. In addition, local government regulations may restrict the Company’s ability to move funds among various locations under certain circumstances. Management does not believe such restrictions would limit the Company’s ability to pursue its intended business strategy.

As of July 2, 2022, there were no borrowings outstanding under the Credit Facility, with $1.2 million in letters of credit issued and $297.8 million outstanding under the Securitization Program. During fiscal 2022, the Company had an average daily balance outstanding under the Credit Facility of approximately $541.4 million and $241.4 million under the Securitization Program. As of July 2, 2022, the combined availability under the Credit Facility and the Securitization Program was $1.40 billion. Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable in the United States to support desired borrowings. In August 2022, subsequent to the end of fiscal 2022, the Company amended and extended the Credit Facility to expire in August 2027.

The Company has the following contractual obligations outstanding as of July 2, 2022 (in millions):

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The Company acquires inventories in the normal course of business throughout the year through the issuance of purchase orders to suppliers. During fiscal 2022, the Company’s cost of sales, substantially all of which related to the underlying purchase of inventories was $21.3 billion and the Company had $4.2 billion of inventories as of July 2, 2022. The Company expects to continue to purchase sufficient inventory to meet its customers’ demands in fiscal year 2023, much of which relates to outstanding purchase orders at the end of fiscal 2022. Outstanding purchase orders with suppliers may be non-cancellable/non-returnable at the point such orders are issued, or may become non-cancellable at some point in the future, typically within 30 days to 90 days from the requested delivery date of inventories. The majority of the purchase orders related to inventories expected to be received during the first quarter of fiscal 2023, are subject to such non-cancellable terms and conditions.

At July 2, 2022, the Company had an estimated liability for income tax contingencies of $134.6 million, which is not included in the above table. Cash payments associated with the settlement of these liabilities that are expected to be paid within the next 12 months is $1.1 million. The settlement period for the remaining amount of the unrecognized tax benefits, including related accrued interest and penalties, cannot be determined, and therefore was not included in the table.

As of July 2, 2022, the Company may repurchase up to an aggregate of $531.3 million of shares of the Company’s common stock through the share repurchase program approved by the Board of Directors. The Company may repurchase stock from time to time at the discretion of management, subject to strategic considerations, market conditions and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. During fiscal 2022, the Company repurchased $193.3 million of common stock.

The Company has historically paid quarterly cash dividends on shares of its common stock, and future dividends are subject to approval by the Board of Directors. During the fourth quarter of fiscal 2022, the Board of Directors approved a dividend of $0.26 per share, which resulted in $25.2 million of dividend payments during the quarter.

The Company continually monitors and reviews its liquidity position and funding needs. Management believes that the Company’s ability to generate operating cash flows in the future and available borrowing capacity, including capacity for the non-recourse sale of trade accounts receivable, will be sufficient to meet its future liquidity needs.

Critical Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. These estimates and assumptions are based upon the Company’s continual evaluation of available information, including historical results and anticipated future events. Actual results may differ materially from these estimates.

The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the Company’s financial condition and results of operations and that require significant judgments and estimates. Management believes the Company’s most critical accounting policies at the end of fiscal 2022 relate to:

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Valuation of Inventories

Inventories are recorded at the lower of cost or estimated net realizable value. Inventory cost includes the purchase price of finished goods and any freight cost incurred to receive the inventory into the Company’s distribution centers. The Company’s inventories include electronic components sold into changing, cyclical, and competitive markets, so inventories may decline in market value or become obsolete.

The Company regularly evaluates inventories for expected customer demand, obsolescence, current market prices, and other factors that may render inventories less marketable. Write-downs are recorded so that inventories reflect the estimated net realizable value and take into account the Company’s contractual provisions with its suppliers, which may provide certain protections to the Company for product obsolescence and price erosion in the form of rights of return, stock rotation rights, obsolescence allowances, and price protections. Because of the large number of products and suppliers and the complexity of managing the process around price protections and stock rotations, estimates are made regarding the net realizable value of inventories. Additionally, assumptions about future demand and market conditions, as well as decisions to discontinue certain product lines, impact the evaluation of whether to write-down inventories. If future demand changes or actual market conditions are less favorable than assumed, then management evaluates whether additional write-downs of inventories are required. In any case, actual net realizable values could be different from those currently estimated.

Accounting for Income Taxes

Management’s judgment is required in determining income tax expenses and unrecognized tax benefits, in measuring deferred tax assets and liabilities, and valuation allowances recorded against net deferred tax assets. Recovering net deferred tax assets depends on the Company’s ability to generate sufficient future taxable income in certain jurisdictions. In addition, when assessing the need for valuation allowances, the Company considers historic levels and types of income, expectations and risk associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies. If the Company determines that it cannot realize all or part of its deferred tax assets in the future, it may record additional valuation allowances against the deferred tax assets with a corresponding increase to income tax expense in the period such determination is made. Similarly, if the Company determines that it can realize all or part of its deferred tax assets that have an associated valuation allowance established, the Company may release a valuation allowance with a corresponding benefit to income tax expense in the period such determination is made.

The Company establishes contingent liabilities for potentially unfavorable outcomes of positions taken on certain tax matters. These liabilities are based on management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The anticipated and actual outcomes of these matters may differ, which may result in changes in estimates to such liabilities. To the extent such changes in estimates are necessary, the Company’s effective tax rate may fluctuate. In accordance with the Company’s accounting policy, accrued interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.

In determining the Company’s income tax expense, management considers current tax regulations in the numerous jurisdictions in which it operates, including the impact of tax law and regulation changes in the jurisdictions the Company operates in. The Company exercises judgment for interpretation and application of such current tax regulations. Changes to such tax regulations or disagreements with the Company’s interpretation or application by tax authorities in any of the Company’s major jurisdictions may have a significant impact on the Company’s income tax expense.

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See Note 9 to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on income tax expense, valuation allowances and unrecognized tax benefits.

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Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. The new guidance provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU No. 2021-01”), to clarify certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting to apply to derivatives that are affected by the discounting transition. Both ASU No. 2020-04 and ASU No. 2021-01 are effective upon issuance through December 31, 2022. The Company plans to adopt ASU 2020-04 and ASU 2021-01 when LIBOR is discontinued and does not currently expect a material impact on the Company’s consolidated financial statements as the Company’s debt agreements already contemplate the discontinuation of LIBOR.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For a description of the Company’s critical accounting policies and an understanding of Avnet and the significant factors that influenced the Company’s performance during the past three fiscal years, the following discussion should be read in conjunction with the description of the business appearing in Item 1 of this Report and the consolidated financial statements, including the related notes and schedule, and other information appearing in Item 8 of this Report. The Company operates on a “52/53 week” fiscal year. Fiscal 2021 contains 53 weeks compared to 52 weeks in fiscal 2020. The extra week, which occurred in the first quarter of fiscal 2021, impacts the year-over-year analysis in this MD&A.

The discussion of the Company’s results of operations includes references to the impact of foreign currency translation. When the U.S. Dollar strengthens and the stronger exchange rates of the current year are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the resulting impact is a decrease in U.S. Dollars of reported results. Conversely, when the U.S. Dollar weakens and the weaker exchange rates of the current year are used to translate the results of operations of Avnet’s subsidiaries denominated in foreign currencies, the resulting impact is an increase in U.S. Dollars of reported results. In the discussion that follows, results excluding this impact, primarily for subsidiaries in EMEA and Asia, are referred to as “constant currency.”

In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles in the U.S. (“GAAP”), the Company also discloses certain non-GAAP financial information, including:

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The reconciliation of operating income (loss) to adjusted operating income is presented in the following table:

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Management believes that providing this additional information is useful to readers to better assess and understand operating performance, especially when comparing results with prior periods or forecasting performance for future periods, primarily because management typically monitors the business both including and excluding these adjustments to GAAP results. Management also uses these non-GAAP measures to establish operational goals and, in many cases, for measuring performance for compensation purposes. However, any analysis of results on a non-GAAP basis should be used as a complement to, and in conjunction with, results presented in accordance with GAAP.

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Results of Operations

Significant Risks and Uncertainties

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, constrained work force participation, disrupted logistics and distribution systems, and created significant volatility and disruption of financial markets. As the scope and duration of the COVID-19 pandemic is unknown and the extent of its economic impact continues to evolve globally, there is uncertainty related to the ultimate impact it will have on the Company’s business, its employees, results of operations and financial condition, and to what extent the Company’s actions to mitigate such impacts will be successful and sufficient.

Executive Summary

Sales for fiscal 2021 were $19.53 billion, an increase of 10.8% from fiscal 2020 sales of $17.63 billion. Organic sales in constant currency increased 6.3% as compared to sales in the prior year. This increase in organic sales was predominately driven by organic sales growth in Asia as a result from strong demand as the electronic components industry recovered from declines in demand during fiscal 2020.

Gross profit margin of 11.5% decreased 23 basis points compared to 11.7% in fiscal 2020. This decline was primarily due to geographical market mix and, to a lesser extent, from unfavorable changes in product and customer mix.

Operating income was $281.4 million in fiscal 2021, representing an increase compared with fiscal 2020 operating loss of $4.6 million. Operating income margin was 1.4% in fiscal 2021 as compared to an operating loss in fiscal 2020 driven primarily by goodwill and long-lived asset impairment expense. Adjusted operating income margin was 2.1% in fiscal 2021 as compared to 1.7% in fiscal 2020, an increase of 36 basis points. This increase in adjusted operating income margin is primarily due to the increase in sales, partially offset by an increase in selling, general and administrative expenses and decrease in gross profit margin.

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Sales

Three-Year Analysis of Sales: By Operating Group and Geography

The table below provides a year-over-year summary of sales for the Company and its operating groups.

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The table below provides the reconciliation of reported sales to organic sales for fiscal 2021 by region and by operating group. Reported sales were the same as organic sales in fiscal 2020.

(1)The impact of the additional week of sales in the first quarter of fiscal 2021 is estimated.

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The table below provides reported and organic sales growth rates for fiscal 2021 as compared to fiscal 2020 by region and by operating group.

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Avnet’s sales for fiscal 2021 were $19.53 billion, an increase of $1.90 billion, or 10.8%, from fiscal 2020 sales of $17.63 billion. Organic sales in constant currency increased 6.3% as compared to sales in the prior year. The year-over-year increase in organic sales was primarily due to growth in Asia where demand for electronic components improved compared to fiscal 2020, partially offset by declines in the Americas and EMEA primarily due to the loss of the TI product line. Organic sales in constant currency excluding TI sales increased 14.8% year over year in fiscal 2021 with all regions contributing to the growth.

EC sales in fiscal 2021 were $18.03 billion, representing a 10.3% increase over fiscal 2020 sales. EC organic sales in constant currency increased 6.0% year over year driven by the Asia region. EC organic sales in constant currency excluding TI sales increased 15.3% year over year. The increase in sales in the Company’s EC operating group is primarily due to improvements in overall market demand as fiscal 2020 was a year where demand had declined due to an overall industry economic downturn.

Farnell sales in fiscal 2021 were $1.50 billion, an increase of $0.2 million or 16.2% over fiscal 2020 sales. Organic sales in constant currency increased 9.5% year-over-year. These increases were primarily a result of improved market demand in all three regions.

Gross Profit and Gross Profit Margin

Gross profit in fiscal 2021 was $2.24 billion, an increase of $177.2 million, or 8.6%, compared to fiscal 2020. Gross profit margin of 11.5% in fiscal 2021 decreased 23 basis points from fiscal 2020 driven primarily by a higher percentage of sales coming from the Asia region and, to a lesser extent, from unfavorable changes in product and customer mix. Sales in the higher margin western regions represented approximately 55% of sales in fiscal 2021 as compared to 60% during fiscal 2020.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A expenses”) in fiscal 2021 were $1.87 billion, an increase of

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$32.7 million, or 1.8%, compared to fiscal 2020. The year-over-year increase in SG&A expenses was primarily due to the impact of the extra week in the first quarter of fiscal 2021, the impact of foreign currency due to the weakening U.S. Dollar and from increases due to the growth in sales, partially offset by the cost savings from restructuring activities and lower amortization expense.

Metrics that management monitors with respect to its operating expenses are SG&A expenses as a percentage of sales and as a percentage of gross profit. In fiscal 2021, SG&A expenses as a percentage of sales were 9.6% and as a percentage of gross profit were 83.7%, as compared with 10.4% and 89.3%, respectively, in fiscal 2020. The decrease in SG&A expenses as a percentage of gross profit was primarily due to the operating leverage created from higher sales, cost savings from restructuring activities, and lower amortization expense, partially offset by foreign currency due to the weakening U.S. Dollar and from the decrease in gross profit margin.

Goodwill and Intangible Asset Impairment Expenses

The Company incurred $144.1 million of goodwill and intangible asset impairment expenses during fiscal 2020. See Note 7, “Goodwill, intangible assets and impairments” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information related to goodwill impairment and intangible asset impairment expenses.

Restructuring, Integration and Other Expenses

As a result of management’s focus on improving operating efficiencies and reducing operating costs, the Company has incurred certain restructuring, integration, and other costs. Restructuring costs primarily relate to the restructuring of the Company’s information technology, distribution center footprint, and business operations. Integration costs relate to the integration of certain regional and global businesses, including incremental costs incurred as part of the consolidation, relocation, sale and closure of distribution centers and office facilities. Other costs consist primarily of any other miscellaneous costs that relate to restructuring, integration, and other expenses, including acquisition related costs and specific and incremental costs incurred associated with the impacts of the COVID-19 pandemic.

The Company recorded $59.4 million for restructuring costs in fiscal 2021 and expects to realize approximately $50.0 million in incremental annualized operating costs savings as a result of such restructuring actions. Restructuring expenses consisted of $54.6 million for severance and $4.8 million for facility exit costs. The Company also incurred integration costs of $35.8 million, which was offset by a gain on legal settlement of $8.2 million and a reversal of $2.6 million for changes in estimates for costs associated with prior year restructuring actions. The after-tax impact of restructuring, integration, and other expenses were $66.9 million and $0.67 per share on a diluted basis.

See Note 18, “Restructuring expenses” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information related to restructuring expenses.

Operating Income (Loss)

Operating income for fiscal 2021 was $281.4 million, an increase of $286.0 million as compared with fiscal 2020 operating loss of $4.6 million, which included goodwill and long-lived asset impairment expense of $144.1 million. Operating income margin was 1.4% in fiscal 2021 compared to an operating loss in fiscal 2020. Adjusted operating income for fiscal 2021 was $407.0 million, an increase of $104.2 million or 34.4%, from fiscal 2020. The year-over-year increase in adjusted operating income was primarily driven by the increase in sales, partially offset by a lower gross profit margin and increases to SG&A expenses.

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Interest and Other Financing Expenses, Net and Other (Expense) Income, Net

Interest and other financing expenses for fiscal 2021 was $89.5 million, a decrease of $33.3 million, or 27.1%, compared with interest and other financing expenses of $122.7 million in fiscal 2020. The decrease in interest and other financing expenses in fiscal 2021 compared to fiscal 2020 was primarily related to lower outstanding borrowings during fiscal 2021 as compared to fiscal 2020.

In fiscal 2021, the Company had $19.0 million of other expense as compared with $2.2 million of other expense in fiscal 2020. In fiscal 2021, other expense included equity investment impairment expense, debt extinguishment costs, and foreign currency losses of $12.9 million offset by other insignificant miscellaneous other income items compared to equity investment impairment expense substantially all offset by foreign currency gains in fiscal 2020.

Income Tax Expense

Avnet’s effective tax rate on its income before income taxes was a benefit of 11.7% in fiscal 2021. The effective tax rate for fiscal 2021 was favorably impacted primarily by (i) a tax benefit arising from the reduction in fair value of certain businesses, resulting in losses that can be carried back under U.S. tax law and, (ii) the mix of income in lower tax jurisdictions, partially offset by (iii) increases to unrecognized tax benefit reserves.

See Note 10, “Income taxes” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on the effective tax rate.

Net Income (Loss)

As a result of the factors described in the preceding sections of this MD&A, the Company’s net income in fiscal 2021 was $193.1 million, or $1.93 earnings per share on a diluted basis, compared with net loss of $31.1 million, or $0.31 of net loss per share on a diluted basis, in fiscal 2020.

Fiscal 2020 Comparison to Fiscal 2019

For comparison of the Company’s results of operations between fiscal 2020 and fiscal 2019, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2020 filed with the SEC on August 14, 2020.

Liquidity and Capital Resources

Cash Flows

Cash Flows from Operating Activities

The Company generated $90.9 million of cash from its operating activities in fiscal 2021 as compared to $730.2 million in fiscal 2020. These operating cash flows are comprised of: (i) cash flows generated from net income (loss), adjusted for the impact of non-cash and other items, which includes depreciation and amortization expense, deferred income taxes, stock-based compensation expense, amortization of operating lease assets and other non-cash items , and (ii) cash flows used for, or generated from, working capital and other, excluding cash and cash equivalents. Cash used for working capital and other to support sales growth was $372.5 million during fiscal 2021, including increases in accounts receivable of $615.4 million and inventories of $409.1 million, offset by increases in accounts payable of $621.0 million and accrued expenses and other of $30.9 million. Comparatively, cash generated from working capital and other was $335.1 million during fiscal 2020, including decreases in accounts receivable of $221.5 million and

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inventories of $266.8 million, partially offset by decreases in accounts payable of $107.0 million and accrued expenses and other of $46.2 million.

Cash Flows from Financing Activities

During fiscal 2021, the Company received net proceeds of $297.7 million as a result of the issuance of $300.0 million of 3.00% Notes due May 2031 and $22.9 million under the Securitization Program. During fiscal 2021, the Company repaid $305.1 million of notes and $231.7 million under the Credit Facility, and paid dividends on common stock of $84.3 million.

During fiscal 2020, the Company repaid $302.0 million of notes and $227.3 million under the Securitization Program and received net proceeds of $223.1 million under the Credit Facility. During fiscal 2020, the Company paid dividends on common stock of $84.0 million and repurchased $237.8 million of common stock.

Cash Flows from Investing Activities

During fiscal 2021, the Company used $50.4 million for capital expenditures primarily related to warehouse and facilities, and information technology hardware and software costs compared to $73.5 million in fiscal 2020. During fiscal 2021, the Company used $18.4 million of cash for acquisitions, which is net of the cash acquired, compared to $51.5 million of cash for acquisitions, which is net of the cash acquired, in fiscal 2020. In addition, the Company paid $12.8 million for other investing activities during fiscal 2020.

Financing Transactions

The Company uses a variety of financing arrangements, both short-term and long-term, to fund its operations in addition to cash generated from operating activities. The Company also uses several funding sources to avoid becoming overly dependent on one financing source, and to lower funding costs. These financing arrangements include public debt, short-term and long-term bank loans, a revolving credit facility (the “Credit Facility”), and an accounts receivable securitization program (the “Securitization Program”).

The Company has various lines of credit, financing arrangements and other forms of bank debt in the U.S. and various foreign locations to fund the short-term working capital, foreign exchange, overdraft, and letter of credit needs of its wholly owned subsidiaries. Outstanding borrowings under such forms of debt at the end of fiscal 2021 was $1.4 million.

As an alternative form of financing outside of the United States, the Company sells certain of its trade accounts receivable on a non-recourse basis to third-party financial institutions pursuant to factoring agreements. The Company accounts for these transactions as sales of receivables and presents cash proceeds as cash provided by operating activities in the consolidated statements of cash flows. Factoring fees for the sales of trade accounts receivables are recorded within “Interest and other financing expenses, net” and are not material.

See Note 8, “Debt” to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information on financing transactions including the Credit Facility, the Securitization Program and the outstanding Notes as of July 3, 2021.

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Covenants and Conditions

The Company’s Credit Facility contains certain covenants with various limitations on debt incurrence, share repurchases, dividends, investments and capital expenditures, and also includes financial covenants requiring the Company to maintain minimum interest coverage and leverage ratios. The Company was in compliance with all such covenants as of July 3, 2021.

The Company’s Securitization Program contains certain covenants relating to the quality of the receivables sold. If these conditions are not met, the Company may not be able to borrow any additional funds and the financial institutions may consider this an amortization event, as defined in the Securitization Program agreements, which would permit the financial institutions to liquidate the accounts receivables sold to cover any outstanding borrowings. Circumstances that could affect the Company’s ability to meet the required covenants and conditions of the Securitization Program include the Company’s ongoing profitability and various other economic, market, and industry factors. The Company was in compliance with all such covenants as of July 3, 2021.

Management does not believe that the covenants under the Credit Facility or Securitization Program limit the Company’s ability to pursue its intended business strategy or its future financing needs.

See Liquidity below for further discussion of the Company’s availability under these various facilities.

Liquidity

The Company had cash and cash equivalents of $199.7 million as of July 3, 2021, of which $150.5 million was held outside the United States. As of June 27, 2020, the Company had cash and cash equivalents of $477.0 million, of which $411.2 million was held outside of the United States.

As of July 3, 2021, there were no borrowings outstanding under the Credit Facility, with $1.3 million in letters of credit issued and $22.9 million outstanding under the Securitization Program. During fiscal 2021, the Company had an average daily balance outstanding under the Credit Facility of approximately $167.8 million and $173.6 million under the Securitization Program. As of July 3, 2021, the combined availability under the Credit Facility and the Securitization Program was $1.64 billion. Availability under the Securitization Program is subject to the Company having sufficient eligible trade accounts receivable in the United States to support desired borrowings.

In July 2021, the Company extended the maturity of the Securitization Program to August 31, 2021. The Company expects to renew the Securitization Program for two years on similar terms in the first quarter of fiscal 2022.

During periods of weakening demand in the electronic components industry, the Company typically generates cash from operating activities. Conversely, the Company is more likely to use operating cash flows for working capital requirements during periods of higher growth. The Company generated $90.9 million in cash flows from operating activities during the fiscal year ended July 3, 2021.

Liquidity is subject to many factors, such as normal business operations and general economic, financial, competitive, legislative, and regulatory factors that are beyond the Company’s control. To the extent the cash balances held in foreign locations cannot be remitted back to the U.S. in a tax efficient manner, those cash balances are generally used for ongoing working capital, capital expenditures and other foreign business needs. In addition, local government regulations may restrict the Company’s ability to move funds among various locations under certain circumstances. Management does not believe such restrictions would limit the Company’s ability to pursue its intended business strategy.

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The Company continually monitors and reviews its liquidity position and funding needs. Management believes that the Company’s ability to generate operating cash flows in the future and available borrowing capacity, including capacity for the non-recourse sale of trade accounts receivable, will be sufficient to meet its future liquidity needs. The Company may also renew or replace expiring debt arrangements in the future and management believes the Company will have adequate access to capital markets, if needed. The Company has historically generated operating cash flows and believes it will have the ability to do so in the future.

As a result of the evolving impacts of the COVID-19 pandemic and the related uncertain future business conditions, the Company in unlikely to make near-term strategic investments through acquisitions.

As of July 3, 2021, the Company may repurchase up to an aggregate of $469.0 million of the Company’s common stock through a $2.95 billion share repurchase program approved by the Board of Directors. The Company may repurchase stock from time to time at the discretion of management, subject to strategic considerations, market conditions, amended Credit Facility restrictions and other factors. The Company may terminate or limit the share repurchase program at any time without prior notice. As a result of the impacts of the COVID-19 pandemic and the corresponding need to manage liquidity and leverage, the Company has suspended share repurchases.

The Company has historically paid quarterly cash dividends on shares of its common stock, and future dividends are subject to approval by the Board of Directors. During the fourth quarter of fiscal 2021, the Board of Directors approved a dividend of $0.22 per share, which resulted in $21.9 million of dividend payments during the quarter.

Long-Term Contractual Obligations

The Company has the following contractual obligations outstanding as of July 3, 2021 (in millions):

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At July 3, 2021, the Company had an estimated liability for income tax contingencies of $145.1 million, which is not included in the above table. Cash payments associated with the settlement of these liabilities that are expected to be paid within the next 12 months is $2.4 million. The settlement period for the remaining amount of the unrecognized tax benefits, including related accrued interest and penalties, cannot be determined, and therefore was not included in the table.

The Company does not currently have any material long-term commitments for purchases of inventories from suppliers or for capital expenditures.

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Critical Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. These estimates and assumptions are based upon the Company’s continual evaluation of available information, including historical results and anticipated future events. Actual results may differ materially from these estimates.

The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the Company’s financial condition and results of operations and that require significant judgments and estimates. Management believes the Company’s most critical accounting policies at the end of fiscal 2021 relate to:

Valuation of Inventories

Inventories are recorded at the lower of cost or estimated net realizable value. Inventory cost includes the purchase price of finished goods and any freight cost incurred to receive the inventory into the Company’s distribution centers. The Company’s inventories include electronic components sold into changing, cyclical, and competitive markets, so inventories may decline in market value or become obsolete.

The Company regularly evaluates inventories for expected customer demand, obsolescence, current market prices, and other factors that may render inventories less marketable. Write-downs are recorded so that inventories reflect the estimated net realizable value and take into account the Company’s contractual provisions with its suppliers, which may provide certain protections to the Company for product obsolescence and price erosion in the form of rights of return, stock rotation rights, obsolescence allowances, and price protections. Because of the large number of products and suppliers and the complexity of managing the process around price protections and stock rotations, estimates are made regarding the net realizable value of inventories. Additionally, assumptions about future demand and market conditions, as well as decisions to discontinue certain product lines, impact the evaluation of whether to write-down inventories. If future demand change or actual market conditions are less favorable than assumed, then management evaluates whether additional write-downs of inventories are required. In any case, actual net realizable values could be different from those currently estimated.

Accounting for Income Taxes

Management’s judgment is required in determining income tax expenses and unrecognized tax benefits, in measuring deferred tax assets and liabilities, and valuing allowances recorded against net deferred tax assets. Recovering net deferred tax assets depends on the Company’s ability to generate sufficient future taxable income in certain jurisdictions. In addition, when assessing the need for valuation allowances, the Company considers historic levels and types of income, expectations and risk associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies. If the Company determines that it cannot realize all or part of its deferred tax assets in the future, it may record additional valuation allowances against the deferred tax assets with a corresponding increase to income tax expense in the period such determination is made. Similarly, if the Company determines that it can realize all or part of its deferred tax assets that have an associated valuation allowance established, the Company may release a valuation allowance with a corresponding benefit to income tax expense in the period such determination is made.

The Company establishes contingent liabilities for potentially unfavorable outcomes of positions taken on certain tax matters. These liabilities are based on management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The anticipated and actual outcomes of these matters may differ, which

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may result in changes in estimates to such liabilities. To the extent such changes in estimates are necessary, the Company’s effective tax rate may fluctuate. In accordance with the Company’s accounting policy, accrued interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.

In determining the Company’s income tax expense, management considers current tax regulations in the numerous jurisdictions in which it operates, including the impact of tax law and regulation changes in the jurisdictions the Company operates in. The Company exercises judgment for interpretation and application of such current tax regulations. Changes to such tax regulations or disagreements with the Company’s interpretation or application by tax authorities in any of the Company’s major jurisdictions may have a significant impact on the Company’s income tax expense.

See Note 10 to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion on income tax expense, valuation allowances and unrecognized tax benefits.

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Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU No. 2020-04”), which provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU No. 2021-01”), to clarify certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting to apply to derivatives that are affected by the discounting transition. Both ASU No. 2020-04 and ASU No. 2021-01 are effective upon issuance through December 31, 2022. The Company is currently evaluating the effects of adopting the provisions of ASU No. 2020-04 and ASU No. 2021-01, but does not currently expect a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“ASU No. 2019-12”), which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU No. 2019-12 will be effective for the Company in the first quarter of fiscal 2022, and early adoption is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective, or prospective basis. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2019-12.

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